It is January 2nd and senior management of Chester meets to determine their inve

Question

It is January 2nd and senior management of Chester meets to determine their investment plan for the year. They decide to fully fund a plant and equipment purchase by issuing 75,000 shares of stock plus a new bond issue. Assume the stock can be issued at yesterday’s stock price ($38.45) and leverage changes to 2.8. Which of the following statements are true? Select all that apply.

Select: 3 a) The total investment for Chester will be $215,826,429 b) Working capital will remain the same at $12,427,700 c) Chester will issue stock totaling $2,883,750 d) Total liabilities will be $127,945,746 e) Total Assets will rise to $229,916,907 f) Equity will be $84,996,931 Assets CURRENT ASSETS Liabilities & Owner's Equity LIABILITIES $ 4,470 $2,000 3.8% 1.7% 0.0% 0.0%. 13.5% 19.0%, $ 52,319 $ 14,245 $ 18,382 44.3% 12.1% 15.6% 720% Cash Accts Receivable Accts Payable Emergercy Loan Long Term Debt Current Borrowing Total Current Assets $ 84,946 Maturing L.T. Debt FIXED ASSETS 15,909 $96,824 63,774 $ 22,379 82.1% (54.0%)| 28.0% 100.0% Plant & Equipment Total Liabilities Accum. Deprec. Total Fixed Assets TOTAL ASSETS |OWNER'S EQUITY 33,050 $117,996 $ 38,681 56,937 32.8% 48.3% 81.0% 100.0% Common Stock Retained Earn. Total Equity TOTAL LIAB. & O.E. $95,618 $117,996 Assets Liabilities & Owner's Equity Inventories Accounts Receivable Common Stock Fixed Retained Earnings Long Term Debt Cash Current Debt Accounts Payable Cash Accounts Payable Current Debt Long Term Debt Common Stock Retained Earnings Accounts Receivable inventories Fixed

Explanation / Answer

Amount raised via share issue = 75,000*$38.45 = $2,883,750

Leverage ratio = Debt / Stockholder’s equity

Stockholder’s equity after new shares issue = $95,618,000 + $2,883,750 = $2,979,368

Debt with leverage ratio of 2.8:

2.8 = Debt / $2,979,368
Debt = $2,979,368*2.8 = $8,342,230.4

Total assets after new issue = $2,979,368 + $8,342,230.4 + $4,470 = $11,326,068.40

Total liabilities = $8,342,230.40 + $15,909 + $4,470 + $2,000 = $8,364,609.40

Based on above calculation, we can determine that only statement C is correct.

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